A Comparison of Stock Market Mechanisms
I analyze a multi-asset market under two trading mechanisms. In the first (the unrestricted system), traders' demand for each asset depends on all equilibrium prices, and prices reflect the information contained in all order flows; in the second (the restricted system), traders' demand depends on the traded asset price, and prices reflect single order flow information. I show that informed traders' use of multidimensional private information depends on the number of prices they observe and on the price-formation process. I then give conditions rendering the restricted system more efficient than the unrestricted system.
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Volume (Year): 35 (2004)
Issue (Month): 4 (Winter)
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Rodney L. White Center for Financial Research Working Papers
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CEPR Financial Markets Paper
0034, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
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